Dr. Trongone’s System for Trading the “Cues” Using eSignal

Although the market often defies logic, realistic market watchers embrace its capriciousness. To survive as an active trader, you must always allow the market to pursue its own course. You cannot deflect its movement!

Because the market is continuously transforming itself, it consistently offers us new opportunities to confront emerging patterns of profitability. In this business, we cannot afford to remain stagnant; success stems from our imagination, as well as a steadfast desire to run meaningful research that can give us a statistical advantage.

There is no consistently reliable predictor of market movements; however, the market will often show you success. When it is moving in a particular fashion, you can become profitable -- if you trade with it. Unfortunately, this is not a simple task, because our emotions are responsible for triggering most trading decisions.

After 40+ years of trading experience, I understand that the trade you make is not necessarily the trade your intellect tells you to make. Emotions often overpower us, and we find ourselves being reactive instead of proactive traders.

Besides describing some of my trading philosophy, let me explain some of the less well known, but extremely powerful features available in eSignal’s newest release. These features make it possible for me to run meaningful research by downloading intraday numbers directly from eSignal to Excel 2007. After performing a careful analysis, I construct my trading strategies. Replacing the guesswork with knowledge effectively enables me to implement my strategies without emotional distraction.

A system may be effective, but is it compatible with your busy schedule? Does it require you to follow the market on a tick-by-tick basis? A system calling for a watchful inspection of the market is not going to be effective if you are away from your trading desk.

For instance, teaching my E-MBA classes takes me to a time zone with a 12-hour difference than the one at home, making it nearly impossible for me to conform to the specifics of my favorite trading strategies. When teaching overseas, I have to trade using systems that are compatible with my sleep patterns.

When I have a challenging day ahead of me, and it is impossible to be at my desk to make multiple trades, I often use a strategy like the one described subsequently that can work with these restrictions. This system is simple, but very effective, regardless of my location or scheduling demands.

You can become more knowledgeable by simply asking questions. For example, what happens to a stock if it closes at its lowest price? Suppose a $40.00 stock finishes the regular trading session within $0.10 cents of its lowest daily price. On the next trading day, will the price be in positive or negative territory – that is, on the ringing of the opening bell, will this stock be trading above yesterday’s closing price?

You can answer this question by performing a statistical analysis. If, after reviewing your findings, it does produce a favorable advantage, you can profit from this information by going into the overnight session with a long position.

With this trading system, you simply wait until today’s closing price is within 0.25% of its lowest daily price. For instance, if the cues began the day trading at $40, a one-quarter-of-a-full-percentage-change would be $40 x .0025 or $40 x .25%. This becomes the acceptable range – that is, the closing price is <= 10 cents from the lowest trading price of the day.

A $50 opening price produces a 12.5 cent difference between closing – lowest daily price.

I use this simple system when trading the POWERSHARES: QQQ. The “cues or cubes” represent the largest 100 domestic and international nonfinancial companies in the NASDAQ-100. In their previous 200 trading days, the average trading volume was 137.5 million shares.

This straightforward recovery strategy is easy to use, has flexible trading requirements and, in 1,692 trading days, was extremely rewarding. In taking a 1,000-share long position, the percentage of success was 61.43% -- averaging $53.07 per trade. Nevertheless, it is a restrictive system -- allowing you a single play once every 16.74 days.

Note: Some brokerage firms have “Good After Time” orders, which allow you to automatically place a market order prior to or during regular market hours. Therefore, if you are without Internet access, you can still take a position permitting you to better conform to the parameters of a day trading system.

These statistics are impressive, especially since we are examining 1,692 trading days. Nevertheless, what has it done for us lately? Because the investment landscape is constantly shifting, it is important to monitor the performance of your system. With economic conditions always changing, you have to be sure your system remains in tradable form. As Yogi Berra would say, “The future ain’t what it used to be.” Because a system is not going to work in across all economic environments, periodically perform a study of its effectiveness in today’s market conditions.

In the 283 trading plays using this system, this column chart displays its recent success. Most recently, it has been producing its best single-day gains.

Remember: When trying to generate profits “do not become inflexible because what the market shows you today may not apply tomorrow.”(Trongone, 2008)

eSignal Exporting Features

The latest version of eSignal allows us to export the after-hour prices of a stock or commodity directly into Excel 2003 or Excel 2007 for further examination. This is a very valuable back testing feature. Besides being easy to download, it offers tremendous flexibility. For instance, you can download prices by requesting a time of day (e.g., 7:00 to 9:00) or by selecting a time increment according to your preference (e.g., 1, 3, 5, 15, 30, 60, 120 minutes, daily).

You begin by clicking the Tools button. Scroll down to “Data Export” to export historical prices. eSignal allows you the flexibility to download any specified intraday time span -- in this case, 30-minute trading segments.

The “Data Export…” feature allows you to copy the information to the clipboard, which will automatically paste the results into an Excel spreadsheet. Once you accomplish this task, you can begin zeroing on the numbers.

As your experience increases, you will automatically begin questioning certain trading conditions. By using this exporting feature, you can begin back testing your suppositions. In this way, you can become capable of producing profitable strategies because you will begin “finding a mismatch between what you can gain (reward) and what you can lose (risk).”

Extreme Scores

Many single-day downturns bring false dawns -- badly punishing us for attempting to recover some of yesterday’s losses. Although these rude awakenings are not pretty, corrections often do mimic the past, allowing you to better prepare for a potentially stormy start to your trading day.

One controversial aspect of trading is the impact of “block shares” on price direction. What constitutes a “block trade? Typically, a large order starts at 1,000 shares, but this designation varies. Each stock, however, carries its own definition. Because the activity of these large orders often fluctuates throughout the trading day, before making a decision, look at the daily trading activity, along with the hour of the trading day. For instance, the cues will encounter less after-hours trading activity -- therefore, fewer block trades. My fascination is with trading the cues during the after-hours session (16.30 – 20.00 ET) with block activity at a minimum of 5,000 shares.

The eSignal program can show trades for the current day or retrace 10 days of trading volume. In the argument (yellow) box, I set the minimum trading volume at 5001 shares. After careful consideration, input a trade minimum, depending on your own specifications. By requesting 5,001 shares, I am expanding the time / sales time horizon on my monitor.

The red oval highlights the frantic activity of large trading volume at 17.10, and again at 17.25. These block shares are accompanied by a price increase in the cues. Mosttechnicians agree that block trades suggest more price authenticity because a dramatic increase in trading volume comes before reliable price movements.

The eSignal 9.00 to 9.30 time chart displays a 30-minute performance of the cues prior to the ringing of the opening bell. This information has far-reaching consequences because they have a way of setting the tone for the rest of the trading day.

If you become capable of producing “remarkable effects,” it is because you are effective at finding a mismatch between what you can gain (reward) and what you can lose (risk). Your observations of how the smallest price movements come together to create a cumulative force can be a rewarding and lucrative exercise. You cannot be inflexible -- be willing to revise your game plan because what the market shows you today may not apply tomorrow.

Over the years, experience brings knowledge. If, however, we believe that we already have the answers, it stifles our creativity, along with our ability to be innovative. When this occurs, it becomes difficult to venture away from our well-worn path. Given that the market is always moving, if we are not willing to revamp our strategies, it will leave us far behind.